The mortgage servicing industry is facing tough questions about how statutes of limitation impact mortgage foreclosures. Black’s Law Dictionary defines a statute of limitation (SOL) as “a statute establishing a time limit for suing in a civil case, based on the date when the claim accrued” to ensure the “diligent prosecution of known claims, thereby providing finality and predictability in legal affairs and ensuring that claims will be resolved while evidence is reasonably available and fresh.” The time limits for bringing a specific type of lawsuit under state law often vary from state to state. For example, in some states the clock is started requiring a foreclosure action to be brought within three years of a default, while another state allows the clock to tick for fifteen years from a default before a foreclosure action must be filed. The SOL for foreclosing on a mortgage is the same as for any written contract in many states, while in other states there is a separate law and time period applicable to foreclosures.

In the past, a state’s SOL on a mortgage foreclosure was rarely an issue as foreclosures were initiated quickly after a default. A common perception was that foreclosures were rushed and efforts surfaced nationally to slow down the process. As a result, it is not uncommon today for a mortgage to have been in default for years before a foreclosure is finally commenced. The same foreclosure defense attorneys attacking foreclosures as being rushed are now contending that foreclosure actions are too stale to be filed and are barred by a statute of limitations. Although raising the SOL is an affirmative defense, where a borrower asserts that a foreclosure should be dismissed, some courts are finding a violation of the Fair Debt Collection Practices Act where a creditor files a suit to enforce a time-barred debt.
Does Bankruptcy Stop the Clock?
When time is running out to file a foreclosure, does the filing of a bankruptcy petition by a borrower stop the statute of limitation? In most instances, yes; otherwise known as “tolling” the amount of time to bring the action. The automatic bankruptcy stay triggered upon the filing of a bankruptcy petition operates as a stay (applicable to all entities) of the commencement or continuation of an action or proceeding against a borrower in bankruptcy, such as foreclosure. Some state laws provide for the tolling of statutes of limitations during periods where a plaintiff is barred by law from filing suit. In many instances, these statutes would presumably apply when the automatic stay prevents commencing or continuing a foreclosure action. In addition, a number of state statutes specifically provide parties with additional time to act where a bankruptcy is involved.

There is also a Bankruptcy Code section titled “Extension of time.” It states that if a deadline fixed by nonbankruptcy law (i.e., state law) has not expired before the date of the filing of the bankruptcy petition, then such period does not expire until the later of the statute of limitations deadline or 30 days after the automatic stay is lifted.

To answer whether or not a foreclosure SOL is tolled by bankruptcy, the issue must be evaluated on a district-by-district basis. It likely will. And even where it is not tolled by the automatic stay, Section 108(c) provides 30 days after relief from stay or the bankruptcy case terminates, albeit that is not much time.

FDCPA and the Bankruptcy Code
Congress enacted the Fair Debt Collection Practices Act (FDCPA) in 1978 with the stated purposes of eliminating “abusive debt collection practices,” ensuring “that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged,” and promoting “consistent State action to protect consumers against debt collection abuses.” For years, debtors have argued that a creditor violates the FDCPA by filing an alleged inflated proof of claim (POC). However, a majority of courts have held that the effect of the FDCPA stops at the door to the bankruptcy court. These courts are steadfast that the remedies for improperly filed proofs of claim, which include contempt and claim disallowance, are fully addressed by the Bankruptcy Code. These courts have held that an inflated POC cannot serve as a basis for a claim under the FDCPA. As the Second Circuit has found, even an invalid claim was not the “sort of abusive debt collection practice proscribed by the FDCPA.”

Is Filing a POC on a Debt that is Time Barred by a State’s SOL a Violation of the FDCPA?
The Eleventh Circuit created a split of authority when it issued its first opinion finding that filing a POC based on a stale debt violated the FDCPA. Crawford v. LVNV Funding LLC, No. 13-12389, 2014 U.S. App. LEXIS 13221 (11th Cir. 2014). Not only are some courts finding that if a creditor files a state court lawsuit to enforce a time-barred debt to be a potential violation of the FDCPA, some courts are viewing the filing of POCs on debts that are stale under a state’s SOL as worthy of penalty. Although the filing of a foreclosure action and the filing of a POC in a bankruptcy case are significantly different, the Eleventh Circuit, in Crawford, held that it did not recognize a difference when it comes to analysis under the FDCPA. Crawford relied heavily on the Seventh Circuit’s decision in Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), to conclude that if it violates the FDCPA to file a state court lawsuit to collect a time-barred debt, it equally violates the FDCPA to file a POC regarding a time-barred debt. Although a majority of bankruptcy courts had consistently found that the FDCPA is not violated by POCs on time-barred debts, the Eleventh Circuit has spawned attacks on so-called “Crawford claims” across the country.
Crawford Claims
In Crawford, the debtor owed $2,037.99 to a furniture company, which was charged off in 1999 and later sold to LVNV Funding LLC (a debt portfolio servicer). Under the applicable SOL in Alabama, where Crawford resided, LVNV was required to collect on the debt by October 2004.

In February 2008, Crawford filed for chapter 13 protection. Even though the SOL expired almost four years earlier, LVNV filed a POC. The chapter 13 trustee scheduled the claim and paid LVNV. Over four years into the bankruptcy case, the debtor objected to LVNV’s claim asserting that the debt was unenforceable, and filed an adversary complaint alleging that the creditor’s act of filing a POC for a debt on which the SOL had run violated the FDCPA. After the bankruptcy court (and then the District Court) dismissed Crawford’s allegations, the debtor turned to the Eleventh Circuit Court of Appeals.

The Eleventh Circuit subscribed to the debtor’s argument, reasoning that similar “to the filing of a stale lawsuit, a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt. The ‘least sophisticated’ chapter 13 debtor may be unaware that a claim is time-barred and unenforceable and thus fail to object to such a claim.” The appellate court ultimately held a debt collector’s filing of a POC on a time-barred debt to be a violation of the FDCPA. The court expressed its displeasure that “a deluge has swept through the U.S. Bankruptcy Courts of late” consisting of “consumer debt buyers — armed with hundreds of delinquent accounts purchased from creditors ... filing proofs of claim on debts deemed unenforceable under state statutes of limitations.”

Irreconcilable Conflict Between the FDCPA and the Bankruptcy Code?
Of significance, the Crawford court “decline[d] to weigh in” on whether there is an irreconcilable conflict between the FDCPA and the Bankruptcy Code, leaving the door open for creditors to raise the issue. In fact, in the Northern District of Alabama Bankruptcy Court, the creditor successfully asserted the precise argument left undecided in Crawford: that “an otherwise cognizable claim for FDCPA damages is precluded by the Code’s and Rule’s comprehensive and detailed protocols for the filing, and allowance or disallowance, of claims.” In re Jenkins, 538 B.R. 129 (Bankr. N.D. Ala. 2015). The Jenkins court agreed with the defendant creditor, noting the idea that the FDCPA penalizes the filing of a POC on a time-barred debt “loses traction” in light of the Bankruptcy Code’s procedural framework for allowing and disallowing claims.

Based upon the case law, the potential award of attorneys’ fees and costs to the debtor where a creditor files a stale claim is heightened in several states. Since the FDCPA is a “fee shifting” statute, expect debtors to continue to seek attorneys’ fees from defendant creditors in other states where a POC is filed on a stale debt. If the claim is stale, consult legal counsel as the likely remedy is disallowance of the claim. If there is some other conduct, however, the FDCPA still may be a threat if the conduct is considered false, deceptive, or unfair.